景順投信 (IVZ) 2011 Q2 法說會逐字稿

This presentation and comments made in the associated conference call today may include forward-looking statements. Forward-looking statements include information concerning future results of our operations, expenses, earnings, liquidity, cash flow and capital expenditures, industry or market conditions, AUM, acquisitions, debt and our ability to obtain additional financing or make payments, regulatory developments, demand for and pricing of our products, and other aspects of our business or general economic conditions. In addition, words such as believes, expects, anticipates, intends, plans, estimates, projects, forecasts, and future or conditional verbs such as will, may, could, should, and would as well as any other statement that necessarily depends on future events are intended to identify forward-looking statements. Forward-looking statements are not guarantees, and they involve risks, uncertainties and assumptions. There can be no assurance that actual results will not differ materially from our expectations. We caution investors not to rely unduly on any forward-looking statements, and urge you to carefully consider the risks described in our most recent form 10-K and subsequent forms 10-Q, filed with the SEC. You may obtain reports at www.SEC.gov. We expressly disclaim any obligation to update the information in any public disclosure if any forward-looking statement later turns out to be inaccurate.

Good morning, and welcome to Invesco's second-quarter results conference call. All participants will be on a listen-only mode, until the question-and-answer session.

(Operator Instructions)

Today's conference is being recorded. If you have any objections, you may disconnect at this time. Now I would like to turn the call over to the speakers for today, Mr. Martin Flanagan, President and CEO of Invesco, and Mr. Loren Starr, Chief Financial Officer. Mr. Flanagan, you may begin.

Thank you very much. Thank you all for joining us today. Loren and I will be speaking to the presentation that's available on the website if you're so inclined to follow through with that. This morning, we'll do what we traditionally do and review the results for the quarter, but also as we have traditionally done, each quarter, we'll focus on a different part of the business. Today, we want to give you our perspective on our European business and how Invesco's positioned to get what we view as a very tremendous opportunity for us in that region. Loren will go into the financials in greater detail, and as always, we'll open it up for Q&A.

So I'm on slide 3 for those that are inclined to follow the presentation. In taking a look at the overview for the quarter, long-term investment performance remained very strong across Invesco for the second quarter with areas of exceptional performance. Our strong investment performance contributed to a continued trend of positive, long-term net inflows for the Firm. And during the second quarter, we saw strong long-term net inflows across all distribution channels of Invesco. Against the backdrop of what we all know are volatile markets, we achieved margin expansion and earnings growth during the quarter. Also during the quarter, we continue our repurchase -- our share repurchase program, purchasing 11.3 million shares for $280 million.

If you look at the summary results, assets under management ended the quarter at $653 billion, as compared to $641 billion at the end of the first quarter of this year, reflecting strong momentum across our global business. Adjusted operating income for the quarter was $285 million, that's up from $272 million in the first quarter, which represents a 4.7% increase quarter over quarter. Net inflows for the quarter were $7.3 billion, this includes net long-term flows of $3.8 billion. This continues the positive trend we've demonstrated over the past several quarters, of increased -- of positive inflows. Again, Loren will go into greater detail, during the financial section of the presentation.

Moving on to investment performance. I think everybody realizes that the key strategic priority for us to deliver consistent good long-term investment performance for our clients. Our commitment to investment excellence has helped us maintain strong long-term investment performance across the enterprise. If you take the -- take a look at the firm as a whole on a three-year basis and five-year basis, numbers are extraordinarily strong with now 82% of our assets ahead of peers on both periods. And again, we have detailed charts in the appendix. But let me hit a few of the highlights of those performance numbers for the quarter. The US value equity remained very strong, with 88% or more of assets under management in the top half of the peer groups over 1, 3, and 5 years. 96% of our UK equity assets are beating benchmarks for -- over years 3 and 5. 99% of our global ex-US and emerging market capabilities are above benchmarks and peers over a 3 year period. And now our Morningstar ratings in the United States, US retail business, are at an all-time high with 65% of assets under management rated 4- or 5-star.

Moving on to quarterly flows. If you take a look at total flows on page 7, you can see strong investment performance across the enterprise contributed to positive flows during the quarter, an improving redemption picture contributed to the continued positive momentum of long-term flows. And, as I mentioned earlier, total net flows for the quarter were $7.3 billion, of which $3.8 billion being long-term flows. If you take a look at flows by channel, again, strong growth sales and improving redemptions across the retail and institutional channels, contributed to positive net flows for Invesco as a whole during the quarter.

Now let's focus on the US retail flows, for a moment. And despite a very volatile market environment during the second quarter, which we all realized by kickoff in May, which, started with the Greek debt crisis, exacerbated by the debt ceiling, and financial discussions crisis we're having here in the United States, what you saw in the month of June was the industry mutual fund -- US mutual fund industry being in net outflows for the first time since December and only the second time over the last 12 months. So, clearly having an impact during that last month of the quarter. But the depth and breadth of our investment capabilities, our strong investment performance, and a very focused client engagement effort resulted in solid momentum for our business during the quarter.

And Invesco's core US retail flows, and that's excluding UITs and ETFs, so really just the core retail business, improved 72% of net flows since Q3 2010. So really, we're seeing quite dramatic increase over that period of time. Our client engagements efforts are clearly paying off, as we had 132 new platform placements since we closed the transaction. And driven by strong investment performance, we continue to see increased RFP activity and are winning mandates across a number of investment capabilities and asset classes, including large cap growth and US value, international equities, and stable values. We also completed the fund merger process successfully during the quarter, with minimal transition issues. And combined, these efforts helped lower the redemption rates below industry levels, despite these very volatile markets that we are now in.

So why don't we move on to some highlights of our European business. And I'm on page 11. And as you can see here, if you take a -- you know, a look at the world, and referring back to some of our previous comments on previous calls, we believe one of our key competitive advantages is our global presence. And we've said many times that to be a successful global asset management company, you need to have a strong business in the United States because of its, just absolute size and significance. And at the same time for long-term success, it's equally important to be successful in developed markets and developing markets around the world. The UK, continental Europe and the Middle East now comprise the world's second largest asset management region, after coming after the United States with 36% of the world's assets under management.

If you take a look on page 12, we have a very strong competitive position in the United Kingdom, continental Europe, and the Middle East. We have 150 investment professionals strategically located across the region, supported by more than 1,200 individuals in 14 countries. Roughly 20% of our assets under management are domiciled in this region. We have market-leading -- as we all know, we have a market-leading presence in the UK and a strong competitive presence on the continent. Our cross-border fund range of 71 open-ended products covers 16 of the top 20 asset categories on the continent. Obviously, we think we're very well placed.

And if you look on page 13, and focus now on the cross-border market. The global cross-border market right now is approximately $3 trillion and growing, and represents a substantial opportunity for Invesco. The cross-border market funds is growing rapidly, it's increased two times since the year 2004 and currently represents 30% of European fund market. But really what's very, very important now, about 67% of the net flows are going to this cross border market. We obviously view this as the future in this marketplace. Invesco's investment capabilities are very well placed within the region. We have a high percentage of 4- and 5-star rated funds in the cross-border range; 24 of our funds right now are 4- and 5-star rated by Morningstar. And as we have done elsewhere, we're bringing the best of Invesco to the European region. We're focused on delivering strong investment performance and a comprehensive range of investment capabilities from all across Invesco to the European investors.

The UK, continental Europe, and Middle East markets represent a tremendous opportunity for us. We've undertaken a broad transitional initiative to build on our strong presence to accelerate growth in the European cross-border market, the institutional market, and the ETF market. And right now, we're clearly maintaining our leading position in the United Kingdom. We continue to look to just continue to strengthen that in the years to come. And we're working to further strengthen our position on the continent, by leveraging our global strengths and world-class capabilities. To achieve this, we're investing resources to build momentum in key parts this business and to strengthen our infrastructure, ahead of some critical regulatory changes.

This will position Invesco very well, as the regulatory landscape shifts over the next several years. Combined we believe these efforts will strengthen our abilities to deliver for our clients and enhance our share of the cross-border retail, institutional, and ETF markets. Leading both revenue growth and efficiency gains will ultimately drive margin expansion. So obviously, we think it's a great opportunity for us. We think we're well placed in the region. But we feel that we can just do -- be more successful in the years to come, with this concentrated effort. So with that, I'm going to pass it over to Loren for his part of the presentation.

Thanks very much, Marty. So turning to the next slide, you'll see that during the quarter our long-term net flows added $3.8 billion. This was despite $2 billion of outflows that occurred between the power shares, QQQs and DB powershares products in the quarter. You'll remember, on last quarter, the QQQs and DB powershares products accounted for $3 billion of long-term inflows. This quarter, we continued to see positive inflows into our institutional money market product, adding $3.5 billion, and market gains added $3.2 billion, and Fx added $1.3 billion, to the resulting increase in AUM, quarter over quarter was $11.8 billion, or up 1.8% giving us $653.7 billion of AUM at the end of Q2. Average AUM for the quarter increased 3.6% to $652.8 million, and our net revenue yield in Q2 was 46 basis points, in line with that of the first quarter.

So let's go on next to operating results. You'll see that net revenues increased $26.9 million, or 3.7% quarter over quarter. While favorable Fx rates added $5.4 million to net revenues. Drilling down on this, you'll see that investment management fees grew $28.2 million or 3.5% to $844.3 million. This increase was driven by average assets under management growth, relative in the first quarter, but also favorable Fx contributed $7.3 million. Service and distribution revenues were up $7.5 million or 3.8%. Also moving in line with average AUM, performance fees came in at $7.6 million. That was up from Q1, as a result of strong investment returns from both the UK and our private equity-funded funds area. Other revenues in the second quarter were at $32.2 million, largely flat with Q1, given the consistent level of real estate, transaction fees, and UIT issuance. Third-party distributions, service and advisory expense, which you know we net against gross revenues, increased by $12.1 million or 3.7%, which was in line with the increase in investment management fees, as well as the quarter-over-quarter growth in our average AUM. Fx added $2.6 million to these expenses.

Continuing to move down the slide, adjusted operating expenses at $466.4 million, grew by $14.2 million, or 3.1%, relative to Q1. FX accounted for $4.6 million of this increase. Employee comp at $310.9 million was up $11.2 million, or 3.7%, versus Q1. As we flagged in our last call, the second quarter compensation numbers included a full three months worth of annual base salary and share-based compensation expense increases, as well as a full quarter of the Hyderabad staff costs that had previously been reported in the property office and technology line item. These factors were partly offset by a reduction in payroll taxes and, in combination, amounted to approximately 50% of the increase. FX increased comp expense by $3.3 million, in variable compensation, linked to performance and growth in our operating income, amounted for the remaining increase. Marketing expense came in roughly flat to the prior quarter. It was up about $0.4 million, really due to sales literature costs. Property office and tech decreased by $2.1 million or 3.3%. Again, this was due to the outsourced administration, as we brought in our Hyderabad operation in-house. FX added about $0.5 million to this line item.

G&A expenses came in at $66.3 million in the quarter, up $4.7 million, versus Q1. About half this increase the result of greater staff recruitment costs, as we continued to selectively upgrade certain of our distribution and investment capabilities. The other half was due to greater levels of travel, generally reflecting heightened levels of our RFPA and other business activity. Fx added about $0.5 million to G&A in the quarter. Continuing down on the page, you'll see the non-op income increased $2.5 million quarter-over-quarter. This was due to increase in mark-to-market of certain of our private equity and real estate partnership investments. The firm's tax rate on pre-tax adjusted net income came in at 26%. Going forward, we expect the effective tax rate to be around 26.5%, plus or minus a 0.5 percentage point.

So our adjusted EPS came in at $0.44, and increased to 7.3% versus Q1. And furthermore, as Marty mentioned, we continued to see margins expand. The adjusted net operating margin came in at 37.9%, up from 37.6% in Q1. Before turning things back to Marty, I'd just like to provide a little more detail on the European infrastructure charges, which is one part of our broader European initiative. As mentioned in the press release that we're outsourcing our European TA and making certain structural changes to both our product and distribution platforms, all of which is expected to be completed by December of 2012. And we believe that taking these steps today will allow the firm to better respond in the future to the pending but still-uncertain regulatory environment.

So right now it's difficult to fully know the impact of the proposed and sometimes actually competing regulations, such as the revised markets in financial instruments directive, otherwise known as Missive 2 in Europe and the retail distribution review, or RDR in the UK. It's clear to us that either of these have the potential to significantly change the relationships between the distributors, clients, and investment managers in the region. Regardless of whatever regulatory outcome ultimately prevails, we believe that outsourcing our European TA will reduce both the cost and risk of operations to us and will allow us to react more swiftly to the changes in the marketplace and, therefore, further solidify and actually strengthen our competitive position. So given this opportunity, we anticipate incurring up to $40 million in total European infrastructure implementation costs, which amounts to an incremental $34 million over the next 18 months. The ongoing benefits this project are well in excess of the projected implementation costs.

We anticipate the project will achieve a cash payback within 2 to 3 years. And yield an estimated IRR of about 30% to 35%, and add an estimated $0.02 EPS accretion to fiscal year 2013 and beyond. Given the fluid nature of regulations and the potential future impact, our infrastructure transformation project, we will provide you updated estimates on the implementation costs and benefits to this initiative, only to the extent, of course, that these changes -- change in any material way. Finally, in terms of reporting and consistent with our past approach to dealing with material one-off types of expenses, the $40 million in infrastructure charges will be adjusted out of our non-GAAP presentation, but they will be detailed and tracked each quarter in our US GAAP reconciliation table within the earnings release. So with that, I'm going to turn it back over to Marty.

Great, thank you, Loren. And we'll open it up to questions people might have.

Thank you.

(Operator Instructions)

One moment for the first question, please. Roger Freeman, Barclays Capital. Your line is open.

I guess maybe first on Europe. Can you maybe talk to how this -- you know, this restructuring/growth initiative is actually sort of split between sort of fixing issues you've had, because I think there have been some performance and flow issues you have had in the UK, versus growing the opportunity set. And I'm still trying to understand sort of the growth component.

Let me try to answer it. First of all, in the UK, we're just -- number one player in the UK; very, very strong, very, very successful, you know, quite dominant. So we're looking to just go from strength to strength there. In continental Europe, we start from frankly position of strength, too, and there's less robust industry data in a consistent way than what you see in the United States. But from the work that we do, when we look at a peer group of what we define as sort of the top 40 players on the continent, we've been, if you look at assets under management, sort of a top-20 player, sort of mid-teens. And where we want to be is a top-5 player. And if you just look, year to date right now, we're, already in the top 10. If you look at the investment performance across the product range, it's very, very strong right now; broad range of capabilities, as I said we're -- If you look at the largest categories, the 20 largest asset categories on the continent, we have product in 16 of them, and it's all, quite good.

So we're really starting from a position of strength on, the retail side. Institutionally, again, we've been there, you know, any number of years. We think we can just be much stronger in the -- on the continent, by bringing, greater range of capabilities. We've been there with the European equity product, on the ground with real estate. We've been recently very successful in bringing in the Invesco perpetual products onto the continent. So, it's really going from a strong position to something we think we can be much stronger at. So again, that's what we wanted to get -- to make the point today, of where we're starting.

Yes, and Roger, I would just make the point that there's really a couple of elements. One of the top-line growth and the opportunity to generate greater market share capture and revenue. Then there's an infrastructure piece, as well, which we feel is critical to support that success. The $40 million that we talked about, which is primarily related to the outsourcing of the transfer agency -- but there's some other structural things within our product and distribution platform that we need to work on -- really will support that success, going forward. So that's kind of how you should think about it, that the $40 million has its own cost save benefits, you know, kind of stream. But that's not really what Marty was discussing. I think it's really kind of, us bringing to bear resources, you know, above and beyond what we've seen in the past.

Got it. Okay. And then, I guess, just with respect to the fund mergers having been completed, I guess you've kind of had a month -- or actually almost about 2 months -- of observing the combined platform. Can you comment at all, in terms of whether you've seen any sort of immediate benefit, in terms of, coming off model hold or any other kind of, you know, inhibitions to selling the product before, or even redemptions in some of the products that were merged into better performing ones?

Yes, Roger. We definitely are seeing the benefit of the transaction. One thing is just, despite the fact that we have obviously a predominant number of our assets sort of located in categories within the industries that have been in outflow, we have seen our redemption rate improve, we're better in industry, by several percentage points. And quarter over quarter over quarter, just going back the last several quarters, our outflow situation has been improving significantly, almost in accelerating way, in terms of doing better each quarter as we come into the next quarter.

So I think we're seeing it in the numbers for sure. I think the opportunity in the second half of the year, you know, we've been actually very focused on all the fund mergers and it's been discussion with distributors about what's going on with the fund mergers. And it's been hard to really get into the next leg of the transaction, which is really talking about, we're done with that, and now we can start focusing on the opportunity and being even more proactive with sales. So, I really think going forward is where you are going to see the real benefit of the transaction. And in the last half of this year, or the first half this year, it's really been a little noisy because we've had to deal with all the fund mergers.

Okay. And last question on share repurchases. You -- fairly sizable pickup this quarter. And I don't have a bunch of prior quarters in front of me, but I'm not sure how outside this is -- how do you think about, cash requirements, when you have $600 million I think on hand now, and, the opportunity around buying stock, going forward?

Yes, I think we're going to maintain sort of an opportunistic approach it our stock buyback, given where our stock is and the value of our stock. And you saw that. Some of the buying I think we've discussed is in line with us eliminating dilution associated with the share grants, deferred stock grants that take place at the beginning of the year. We definitely did above and beyond that, this first half. We are going to be balanced in our approach, though, and so we are going to continue to focus on paying down debt. So we don't want to lose sight of those capital priorities. But we are not, again, in any way, tying our hands, in terms of what we'll do with the stock buybacks. Hopefully that gives you a sense of our approach.

Yes, okay. Thanks a lot.

Sure.

Thanks, Roger.

Michael Kim, Sandler O'Neill.

Just first, can you give us some color on the quant business? It sounds like interest in these sorts of products is on the rise, as maybe performance has started to come back. Just curious if you're seeing the same things, and any color, terms of flows during the second quarter would be helpful, as well.

Yes. Let me make a couple of comments. You're right. If you look at quant performance, ours in particular has been very, very strong all year. And it was probably, maybe the [nator] of what was going on with quant third and fourth quarter, into the first quarter of this year, where it was the favorite child in 2005 and '06 and is -- just really as an industry, was under severe pressure. What we are now seeing is because of the models coming back and the performance that feels like that pressure is off, and you're starting to see inquiries, RFP inquiries around quant, we're seeing it in particular with some of the global equity portfolios, in particular. And so, we think we are going to see brighter days ahead probably for the quant sector. In particular for our group is -- which is the investment performance has been very strong.

All right. Any color on, kind of, flows in the second quarter?

Yes. I think if we look at the quant, it is probably somewhere a little bit north of $1 billion outflow, just from with the last of we saw, in terms of, sort of, [min] terminations. We feel that we're largely past that, at this point. So we're turning the corner.

Okay.

I think you're on the right point, an inflection point. Those are -- people are opportunistically going back to quant. And I think there are still people that haven't confirmed their commitment to quant yet. But it does feel like you're now moving into that uptick area.

Okay. And then maybe just kind of turning to the money market fund business. You've been able to generate some pretty good growth the last couple of quarters, at a time when maybe the industry has been suffering some outflows. So just wondering what the drivers might be, in terms of the market share gains? And then also any thoughts on the regulatory environment, and, maybe the likelihood of potentially transitioning to floating NAVs for some of those products?

Excuse me. Just for us, in particular, as you saw the flows coming in, and it's really just on the back of, as you know very well, it's a very, very good team. They do superb credit work. It's highly recognized by the client and in the industry. And I think whenever you get pressure points, you know, you tend to see separation. And again, I think that was the main driver of it.

At a more macro level, if you consider where rates are in the money fund industry, it just proves thoroughly that there's an absolute need for the money fund vehicle in the industry. It's done very, very well. Even during a low-rate environment and, frankly, another crisis period in the -- in quotes, crisis period in the marketplace. And the regulators have been clear that, even though there have been very, very good changes put in place by the SEC, that make the industry just, that much stronger than where it was previously. And again, with already a very good track record of success, that they want more done. And if you look at some of the suggestions out there, the floating NAV is still out there. I would venture to say that's not the likely outcome. If you just look at all the reaction to the idea of a floating NAV, all the users of money funds concluded that it just really, it does not make sense. And so, there will be something different, other than a floating NAV, would be, what I would say.

Okay. That's helpful. Then just -- do you have an end-of-quarter share count for us?

Yes, I do, Mike. Bear with me one second. It is $461.4 million.

Okay. Thanks for taking my questions.

Sure.

Michael Carrier, Deutsche Bank. Your line is open.

Thanks, guys. Just focusing on the US retail business, and don't want to get into too much month-to-month, but you guys have that chart on slide 9, where you provide like a redemption rate, and you had that decline into the second quarter. Any clarity -- and granted like the industry flows and redemptions were probably a lot worse in June, but just any color from like in April, May, to a June level? Just given post the fund mergers.

Let me try to answer as best I can. We don't publish monthly information, but so let me speak to industry-type topics and, us in the context of that. And I think the answer will be pretty quite clear. If you looked at the first quarter, you could see where the trends were for us, on the retail side, up and up. Once the uncertainty in the marketplace started, as I said, in May, really from the European debt crisis, and then some of our fiscal challenges in the United States, you just saw something very dramatic change happen in the month of June. And if you look at equity flows, in particular, in the month of June for the industry, what were the 3 categories that were in the biggest outflows?

You saw US equities go from what was $4 billion out in the prior month to $15 billion out in the month of June, alone. You saw net inflows in international, equities of $3.2 billion to out of $0.9 billion. And you saw some uploads in the sector. So you -- again, where did the money go? It went to intermediary, fixed income, and again -- we've seen this movie before, and that's really what you saw happening. So as investors got scared of the outlook for the markets, they went back into fixed income. And if you look at our assets under management, our relative strengths, you can understand why you saw that quarterly dip, although we were still in net inflows. And as Loren pointed out, you have a quarter over quarter relative net inflow in improvement, in light of this market environment, it is really quite amazing.

Yes. Just within the month, I think the flow pattern was sort of degrading through the course of the quarter. You had to think about it. April was good. May was not as good. And June was the worst month. And so, it was sort of a downward trend, which again, I think we're hopefully seeing some stabilization. But it definitely was in line with the industry in those -- in that trend line.

Okay. And then the alternatives, you guys have mentioned in the past that the real estate business continues to do well. On the flows this quarter, just seem very strong. So I guess any granularity around what's driving that, and maybe even the outlook, in terms of the pipeline on the institutional side.

Maybe I'll make a couple of comments, and Loren can, too. So, you know, it's interesting, if you look at where investor appetite is right now institutionally and what's driving it, for us in particular in this broad -- real estate is a very, very attractive asset class around the world. And, we are benefiting from that with a very, very strong team. The other thing that is, where we are seeing traction is in what we -- the premium plus asset allocation capabilities have really been gaining traction. And in particular, a sleeve of that has gained traction, which is the commodities sleeve, which is probably not surprising, again, recognizing where many people think the world is right now. Those are probably 2 of the bigger alternative asset categories for us, that we can speak of. And it seems to be something that is continuing.

Yes. I think the other point, as far as, you know, we're having huge success with our read product, in particular. And especially in Japan. This has been a positive trend for us. That's not slowing down. In fact, to that -- that's an element, and again in the UK, positive, Europe positive flows. So it's broad based, not just fixed income, and it's not equities. So I -- we've have been really pleased to see it across a variety of products in the retail platform outside of the US.

Okay. And then last one. Perpetual, if we look maybe a year ago, performance was under some pressure. The past 6 months, performance has done really well. When we think of the seasonality of performance fees, when we start thinking about the end of the year, the odds increasing, that performance fees will be more in line with this quarter and ramp up, or is it still too early to tell?

Yes, I think, Mike, it's unfortunately too early to say, only being halfway there. And it's definitely a point in time, kind of, calculation that takes place. And we've seen there is -- can be a fair amount of volatility in the short-term numbers in the discipline that's being run out of the UK. So obviously right now, year to date doing very, very well. So I'd say, if you extrapolate, yes, there's hope. But I wouldn't want to be -- I don't want to just extrapolate, because we still have 6 months left of a fairly unclear time ahead of us. So I'm sorry, it's not very helpful for your model. Again, when we think about our plans, we tend not to assume any performance fees, and then just because it's so hard to actually forecast performance.

Yes. Okay. Thanks a lot, guys.

Thank you.

Glenn Schorr, Nomura.

Hi, thanks very much. So question, I think it's an obvious statement about how you feel about your stock, because you keep buying it back. But debt to EBITDA, loose calculation; 1.4 times, up from 1.2. Just curious on how you think about the comfort zone there, and buying back along the way.

Glen, I think we have a definite plan in place and stated our capital priorities, I think, pretty clearly. We certainly needed and wanted to buy back some shares related to the share grants that were issued, as part of our year-end awards. In terms of the incremental stocks that we kind of brought in through the quarter, they call it around $200 million-ish was the amount. That in no way sort of going to change the nature of our financial strength.

We're very focused on continuing to bring down debt. We have a lot of flexibility with a new credit facility to do that. And again, there was a little bit of just timing because we had -- and leverage, because we bring back dividends from the UK, on a periodic basis. And we need to get audited financials, in order to do that. So again, I think you will see through the course of the year, all that kind of smooth out very nicely.

Okay. Cool. And the last one is -- when you look through the ETF, your passive businesses, it's predominantly US business still. And it's growing nicely. Just thoughts on expanding -- you have a great distribution network, especially in Europe. How hard or easy is that, to take that product, and manufacture things more geared toward some of the other markets that you're already in? It feels like you already have the distribution.

Yes. And that's a great question. And it is -- we think one of the great assets of the company, the ETF capability that we have. It is a fact, we're getting stronger and stronger in the United States. The area to look right now is -- if you just start to look at different parts of the world, we launch ETFs in Canada a year ago, probably approaching $2 billion in ETFs. We just got some of the US listed ETFs listed on the Canadian stock exchange. We think that's going to be a very helpful thing in that marketplace. In Europe, we launched probably 3 years ago, if I'm getting the timing right. You can think of the launch in the marketplace environment that we've been in. So it's been a difficult market.

Part this European initiative, we're looking at the ETF market in a very real way. And I will say, market by market, they're very different. The European market right now we would classify much more as a -- an institutional market and has been tied more to larger banks, in particular. Yes, some of our traditional competitors are there, but if you look at the impact that some of the banks have had with exchange-traded notes and investment banking capabilities are -- tied to it, it is a different market. That said, it's a market that we intend to pursue. And we think in time we will be successful on the continent also. Again, we just think there's opportunities around the world. We've listed in Mexico, we used it as another way to get into other markets. And again, we are continuing to live market-by-market, to see where it makes sense for us.

I appreciate that. If you go the ETN-route, do you need someone to play the role of guarantor?

Yes, it's just not an area that we're focused on.

Okay, got it. All right; I appreciate it, thank you.

Yes, thank you.

Bill Katz, Citigroup.

Thank you. Good morning, good afternoon, everybody. A couple questions. Loren, perhaps for you. In terms of the expense guidance and then, sort of curious, if you will, what's the underlying revenue and expense saves onto a growth to get you to that 30%, 35% IRR, as well as the accretion on earnings?

Yes, so the -- there's no revenue growth assumed in that IRR. It is essentially an ongoing cost-save that will occur at the end of the completion of the project, which is somewhere between $13 million to $15 million per year. And I think there's a small growth across maybe 5% growth associated with that, as the business is assumed to grow. So that is where the 30% to 35% IRR gets calculated.

Very conservative.

Very conservative.

Those saves then, are just beginning at the end of the restructuring? Was it --

Yes, because we are going to have parallel activities going on. And so it's really when the project is complete, that you are going to see the full saves come to fruition.

And second question, just within the alternative business. There seems to be pretty sizable allocations going into that platform. Could you give us a little sense of what's happening with Wilbur Ross from 2 levels? One in term of harvesting previous gains? And I think that's been almost a 5-year investment for you guys. Sort of wondering on that score. And secondly, just in terms of the fundraising backdrop?

Yes, on the harvesting, again, I think he, as we mentioned in the last call, became substantially invested in fund forward. So he's at the point where he can actually begin to start sort of harvesting and so, that is the phase we're in there. So you'll continue to see activity. And you have done some of it, that I think is notable in public note, in terms of some of his holdings. So moving ahead well.

The -- on the fundraising, I really cannot comment, unfortunately, Bill, as we have said in the past. Just because we're in a position where, the fund is still in a position of fundraising. I would say one thing though, that generally with private equity fundraising, we're seeing industry wide, sort of a lengthening of time to raise funds, sort of an 18-month cycle now, is what our sales force is telling us, for most private equity managers. So I think we are in that same space in case you are wondering what's going on.

Okay. That's helpful. And just one last one, thanks for all my questions. In terms of US retail, you mentioned earlier -- I apologize if I missed the number -- a number of -- sort of new installments on platforms, if you will. What's the historical lead-lag between getting onto those platforms, and then seeing a more palpable step-up of organic growth?

Yes, that's a good question. I really don't think that I can quantify it. But let me -- and again, that's not very helpful to the question that you're asking. So the way that we look at it, is once you're on, if you maintain your performance, you're on for a good long time. And what this is doing, this is broadening, very, very much, our depth and breadth within these different platforms. And I think something might be more helpful, quite frankly, again, if you look at our investment capabilities, they are heavily oriented towards equity products right now.

And so, what we've been saying and what we really need is a movement back to equities. Yes, US equities, but also international equities. And we should play really quite well. But the big, big driver is going to be when people start to put money back into US equities. I think it's going to be a very, very different outcome for us in this organization. And these are the important elements to have in place.

Thank you. Okay, thanks for taking all my questions.

Thanks, Bill.

Ken Worthington, JPMorgan Chase.

To follow up on Bill's question, it's been about a year since the Van Campen merger. You've gotten on 130 additional -- well, there's been 130 platform placements. But placements doesn't equal sales. So, where are you at driving sales through the distribution channels that are new to either Invesco or new to Van Campen? And maybe a way to address that is to talk about what percentage of retail sales are coming from the new or enhanced relationships at this point? And then to maybe help us size -- better think about the opportunity, what inning are we in, the first or second inning, third inning, or is it later in the game, there?

Yes. Good questions. So let me try my best to answer those. From the -- let's take the baseball analogy, from the inning that we're in, I think that we are very, very early innings in the results category. But that, if you want to call it the foundation-building, the quality of the team, the capabilities of the team, the capacity of the team, is very broad and very, very deep. And that's what you're seeing with the RFP activity, the placement activity, the investment performance at -- right now at 82% on a 3-year basis, it's just strong. That's the foundation element of it.

The -- what I would say on where are we not and where I would like us to be, and it's nothing new. It's the public awareness of the Invesco brand and through all the FAs throughout all the system, has it been a focus, is it increasing? Yes, it is. Again, that's going to be a multi-year effort, simply because it's a new name in the channel. And I don't have the gross numbers in front of me, but I still think what a very, very good indication of what are the relative changes during this period, recognizing the line-up's just gotten completed, which is hard to believe, but that's how long it takes to get through that. And from our point of view, we did it as fast as can be done. But again, going back, since Q3 of 2010, net flows in that core channel, not ETFs, not UITs, have improved 72%. And if you put that in the market environment that we are in, and where the flow's have been going within this market environment against where investment capabilities are matched, I think that's quite a darn good thing. So hopefully that's helpful, Ken. And Loren, would you add?

Yes, again, I think I mentioned at one of the other questions. But clearly, now our conversations are being centered on product solutions and not the fund mergers and the capital gains mergers and all of this noise around the products. So I think we have that in place, going forward, so we have not seen that historically. And also when you think about what inning we're in, we're actually being rained on, (laughter) you know, (inaudible) it feels like. And it's hard to actually say, when you're seeing kind of Armageddon, and the US debt ceiling and other things happening. So, it is a little hard for us to sort of anecdotally give you some sense of how it's going, because we're in sort of an unusual time. Other than that, I'm looking at the numbers, and we're ahead of plan on sales across the US, and in the channels that we're looking at. And so I do believe, we are executing exactly the way we thought we would, and even better than we thought we would. And really, when I think about the opportunity and, again, according to our plan, it's the second half of the year, which is what we've been saying, consistently, after the fund mergers, that we're going to see the real benefit of the transaction.

I think, Ken, if a funny reverse sort of way, these continual -- 2 years in a row, as far as I'm concerned. May a year ago, that sort of lacked the confidence in the market -- May this year, the lack of confidence in the market,, which we are perpetuating. And it's slowed down, what I thought and what all of us thought would be movement out of cash and fixed income into equities. And each time, there's been a blowback, when investors have lost confidence. That's actually probably helped us, longer term, right? It has allowed us to have the wholesalers get to know their territories, because they were -- more than half of them were new in different territories. For us to get more capabilities on the platforms, and the like.

So longer term is probably a better thing. But again, it's -- you've not seen that turn. Again, I think as Loren talked about, very concerning thing probably for all of us in the United States and probably other parts of the world, what's going on in Washington is just not very helpful right now. It is definitely negatively impacting investor sentiment, you see it in the marketplace. The good news is, what a great buying opportunity. But that said, I do think once it turns, we just continue to get better and better positioned against the capabilities that we have.

And, just a little more color. One thing that we have working for us strongly even with most of our mutual fund products being centered on equities, UITs and power-share products are more balanced between fixed income and equity capabilities. And those have been consistent. We've seen flows -- positive flows in each of those areas, for every single quarter, for I don't know how many quarters in a row. So that continues to be a very strong theme.

And again, we know both of those products are -- and I'm talking about traditional power shares products, very profitable for us. And then, in term of the mutual funds, (inaudible), SMAs, as I mentioned earlier, every quarter that we've seen since Q3, our redemption or our net outflow number on that product has been improving, significantly. Where it's almost gone in half from going Q1 to Q2 of this year. So we do see the trend. It's very obvious to us in terms of the net outflow improvements and the trajectory on some of those core things despite, all the volatility that we're seeing on equity products.

And Ken, again, extending your question -- and I can't remember how you phrased it, at one point. But if you look at the building blocks of the organization, if you look at the breadth of the investment capabilities, you look at the performance of the capabilities, the placement of the US core retail business, what ETFs, UITs are doing. What's happening to the institutional business in the United States, the success of alternatives, quite frankly, moving around the world, the progress we're making in Europe, the strength, in the UK, what's happening in Japan, what's happening in greater China for us. Canada, really quite frankly, the investment performance, really starting to turn in a very real way, which is going to position us differently there, and ETFs in Canada and frankly some emerging early-day success in Canada, too. Very strong building blocks. We do need a market environment to help us. But that said, I think the company is positioning itself very, very well for some real good success.

Great. Thank you very much.

Thanks, Ken.

Craig Siegenthaler, Credit Suisse.

Representative Berkley is introducing a Bill that will allow Invesco and other multinational companies to repatriate foreign earnings at a lower text rate. I'm wondering how much excess cash do you have outside of the US, and is this something that you could use?

I guess, Craig, good question. I think it won't really directly affect us, because of our Bermuda domicile. We have no constraints in terms of tax considerations, about bringing dividends back. In terms of trying to worry about what that means for the dividends being taxed. So, it's helpful probably for US global asset managers, but not relevant to us. We continue to bring back dividends from the UK, from Europe, from Asia, and again, we get taxed on our earnings, based on where those earnings are generated. So I -- not really a topic for us.

Okay. And then just real quick, on capital management. Given the increase in debt this quarter, should we really view this as kind of peak-debt for Invesco, and look at kind of future cash flow, probably some of it being diverted to reduce these levels? How should we think about the mix versus debt, and excess cash?

Yes. I don't want to commit entirely, but I'd say, yes. Generally that's the right approach. That we had some temporary spiking up the leverage due to, as I mentioned, the timing of when we bring back the cash from the UK. And so that will bring down the ratio. And again, I think we are still quite focused and wanting to have a balanced sort of approach to paying down the credit facility. So I would say in principle, absolutely.

Got it. All right. Great. Thanks for taking my questions.

Jeff Hopson, Stifel Nicolaus.

Okay, thanks a lot. So, first question, stable value. Can you give us the flows for this quarter? And then Europe, you did see improvement in flows in the quarter. Can you give us any background on that? I believe I saw that in May, Invesco -- on the equity side -- was particularly strong. Can you confirm that, and just talk in general about the flows this quarter?

Okay, let's see. I'm looking around for stable value here, so hold on. I think we've probably got some. Might not as -- quite as strong as what we saw in the first quarter.

Maybe a couple comments just generally. On a more macro level. Stable value, we find ourselves in sort of a pole position. And the gating factor has been more the insurance wrappers, than anything else. Demand is high, but the close in the quarter were probably less than what they were in the prior quarter, simply because of the wrapper element. And again, in -- the more macro comments, the -- we did see ourselves, as I said, as a net flows on the continent in the top 10 in the last quarter. And where we were seeing a lot of flows, where the European equity product on the continent, which has been a good performer, in addition to what has been the European bond product. So I don't have specific numbers, but you're right, those are the themes, and that's what's been driving it.

So in term of stable value, again, I think you're going to have to take sort of a range now of somewhere between $0.5 billion to $1 billion. We're still looking to confirm, because some of it comes through the DC-side, some is institutional. So we have to add together some numbers I just don't have in front of me.

Okay. Great. Thank you.

Yes.

Dan Fanon, Jefferies.

Good morning. Marty, you talk about a lot of growth opportunities, and I was wondering as you look at all your different businesses or products, are there any that are sub scale or potential brands that you might look at that have limited growth opportunities that you might look to exit at this point?

Yes. I wouldn't say that's the case anymore, there's always areas, but it's always on a products-by-product basis. And if you look at what we've focused on and accomplished the last 5 years, we feel very, very good about what's out there. But again, there's always areas in a product range that, we will -- if we can conclude they're not competitive, we will merge them. And we are pretty well done with that in the United States. There's probably a handful more that we might look at in the year or 2 when -- In the continental Europe, that's part of some of the activity going on right now with the different domiciles we have there. One in Luxembourg, one in Dublin, and probably that range, we'll do some work on. That's probably too much detail. We think we're positioned very well that way.

Okay. And then looking ahead, Loren, as we look at expenses on the non-GAAP side. Is there anything that, you know, you see in the second half of the year that might be one-time or something we should be looking at, in terms of modeling perspective?

Nothing offhand. I think, Dan, we're -- the one that we highlighted are the big ones related to the outsourcing. By far and away, that's the big one. Anything else is probably just noise and nothing that I can really just tell you about.

Great. Thank you.

Yes.

Thanks, Dan.

Robert Lee, KBW.

Let's see, I guess kind of hard -- most of my questions were asked. But real quick, I'm curious on the outsourcing of the European TA, it seems a little counter to -- I think my impression of what you guys have been doing the last 5 or 6 years, with creating the centers in India, and I guess up in Canada.

Yes.

And since TAs is usually a big chunk of what gets kind of outsourced geographically at least, why outsource into European TA to I assume a third party? Does it somehow mean that the scale you can realize in the rest of the business isn't going to be at the margin, as great as you thought? I'm kind of -- seems, again, a little different from what you've done with other TA operations.

That's an excellent question. Our view is this, our general instincts is yes, we want control, make sure we do a great job for the clients, and particularly the client interface side. We'll continue to be high quality in what we provide to the clients, so that's not changed. Part this is our read of what is some of the possible outcomes in the regulatory environment, in Europe.

And again, there's not absolute conclusions, but if some of the proposed regulation goes through, it will put enormous pressure on the existing business model. And the business model of a relationship between, a money management firm and a individual investor, or through the financial intermediary, which could put just tremendous pressure on that traditional per-account charge. And who's going to carry the burden, and who's going to take the regulatory responsibility for some of the know-your-client-type activities, and the regulatory environment coming with it. So we did do -- we're down a path doing something different. But we thought it was uncertain enough that we wanted to get ahead of the whole thing. But again, we're still committed to making sure that the client relationship is a very, very good one and a positive one.

Okay. Maybe not -- to go back to maybe slide 9.

Yes.

We talked about retail sales. I wanted to make sure I understand looking at this. The Q2 2010, means in gross sales, redemptions, net; that's pro forma for the Van Kampen acquisition, is that correct? Because the spike in sales and redemptions is pretty dramatic, year over year. I'm just curious -- you kind of talked about this a little bit, but how much of that big jump in sales is driven by -- and redemptions is driven by BTF business, which seems like it's in there, ex-QQQs or the retail business, because the year over year jumps are pretty dramatic.

So the Q2 2010 has only 1 month of the pre-close situation. So think about only 1 month of the Van Kampen-Morgan Stanley products being included. Whereas Q3 has obviously 3 or 4 months of it. Sales will grow, obviously redemption will grow, because of the base of the assets have grown, at that point. So, it's really more of a mechanical formulaic thing, as opposed to looking and saying we're suddenly selling a whole lot more. It's just the franchise got bigger at that point.

Okay. So it wasn't pro forma for the whole Van Camp--

No, no.

Okay. That was it. Thanks for taking my questions.

Thanks, Rob.

Jonathan Casteleyn, Susquehanna.

Just wondering if you see any impact of a US credit down-grade, on any of the money fund businesses. Either stemming some of the inflows trends that you're seeing, or anything at the fund level that could be troublesome?

Let's see, I, it -- the fund level, again, I think ourselves and other providers are very much on top of that. And we don't see that as a topic. And with regard to, you know, the fund slows, I think what we've seen and others, it still continues to be a very highly thought-of product. And, I don't see it being negatively impacted during this environment.

Okay. That's helpful. Thanks. And then just obviously, you're cash flowing at a level you feel comfortable buying back your stock. Can you remind us of your debt maturities, and then any prepayment schedules that apply to those if you were to early retire some debt?

Yes. So the next one is April 2012. It's $215 million. The one after that is February, and that's 2013, and that's worth $334 million. And then the final one is December 14 -- sorry, that's December 2014, that's $197 million. And there is no provision for prepayment. So you should assume that they're going to be outstanding through maturity.

Great. That's helpful. Thanks.

Operator. Marc Irizarry, Goldman Sachs.

Great. Thanks. Just on the institutional flows for a second. I know activity might have been a bit slower during the period. But it looks like some of the momentum that built there might have slowed. Marty, anything going on regionally that you're seeing in the institutional business? Or is that just a function of more subdued environment, because it looks like sort of the gross inflows in institutional slowed a little bit.

Yes. It's more timing than anything else. We just continue to, as Loren talked about the RFP activity continues to be very, very active. From RFP activity to success, it's just the lead time, and do you win in the finals or not? It's more a reflection of the lumpy nature.

But again, I would suggest that in the US, I'm feeling we've got great leadership and really, good, good traction building. We're very early stages in Canada from the start where we think we'll see success there. Continuing to do very well in greater China, Japan actually, we're seeing very good activity on the continent. Again, we continue to see activity in the UK. So it's really been broad based. So it's more timing than anything else.

Yes. I think we got real estate wins in Canada after our big push there. So it's encouraging.

Okay. Great. Thanks.

That does conclude today's conference call. Thank you for participating.

Thank you very much, everybody. And we'll talk to you next quarter.